From the beginning of 2020, the world changed. With simultaneous social and economic shutdowns occurring around the globe, the business environment shifted, altered, and was materially transformed.
As with the GFC in 2008, different industries have been impacted in different ways. Some have been completely shut down, while others have benefited enormously from new consumer or business-driven demand.
For those of you who are thinking about succession, or an exit from your mid-sized private business, or those who were considering retiring in a few years but have since decided to bring that objective forward, there are many questions to be addressed.
- Am I able to sell my business in this environment?
- Are there any buyers out there who aren’t simply ‘bottom-feeding’?
- What about valuation if my business has been negatively (or positively) impacted during these recent times?
- How long will it take to find the right buyer with a clear fit and suitable valuation expectations?
- If I do decide to bring the sale process forward a few years, how can I retain some future cashflows?
- Where and how do I start the process?
Let’s start with selling your business in the current COVID-19 environment.
All businesses go through lifecycles and experience different phases at different times. Simple examples include startup, growth, national expansion, diversification, investment in R&D, external debt or equity funding for acquisitions, developing new distribution channels to market, international expansion, decline due to changing preferences or markets, and so on.
Each business is unique in its own way and lifecycle stage. So while you may be considering an exit, there are others thinking long and hard about how they can expand and grow their business going forward. Presented correctly, your business can be the ‘solution’ to someone else’s growth ‘challenge’.
There are still plenty of cashed-up business owners out there in the growth phase. Many lie awake at night seeking to solve the challenges of increasing revenues, improving the bottom line, product or service diversification, geographical expansion or acquiring new capabilities. These are genuine buyers, seeking commercial solutions to their own commercial problems, not bottom feeders looking for a bargain.
Similar to what we experienced post-GFC, in order to sell your business in the current environment, you just might need to broaden your reach to include prospective buyers you would not otherwise have considered. For example, in adjacent or complementary industries where commercial synergies crossover.
By broadening the target pool of buyers you can increase the value of your outcome and the future success of your business.
Solving someone else’s business or growth challenge is what ultimately drives the valuation of your business. The reason different buyers are prepared to pay different prices for the same asset (read: business) is that fundamentally it offers a different commercial ‘solution’ to each of them (and thus has a different value proposition).
What about the negative (or positive) impact of COVID-19 on trading, earnings, and valuation?
Valuation fundamentals have not changed. For example, an established business that was worth an EBIT multiple of say between 4.0x to 6.0x before COVID-19 is most likely still going to attract the same earnings multiple.
The implication is that underlying earnings will likely have shifted down or up, thus impacting valuation in absolute dollar terms. This issue can generally be mitigated through deal structuring.
If the earnings impact is temporary, and this can be demonstrated, then it’s unlikely a purchaser will be willing to pay more or less for your business. The issue becomes ‘earnings uncertainty’.
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This is where deal structuring can play a role in ‘building a bridge’ between the valuation expectations of buyers and sellers. There are various approaches to this including earn-outs, deferred payments, retained equity positions with future buy-out provisions, and so on.
However, if the longer-term earnings have been materially impacted (up or down), then the underlying value of your business will have fundamentally changed.
To find the right buyer with a clear commercial fit for your business and reach alignment on valuation expectations typically takes between eight to 12 weeks in the market.
The milestone you’re aiming for at the end of this period is a signed terms sheet or heads of agreement, which is subject to due diligence. From commencement to completion, in our experience, the sale process is typically between six to nine months.
If you’re thinking of bringing the sale of your business forward a few years, then you might consider retaining some equity for future cashflow? This type of deal structure also speaks volumes to purchasers, as it demonstrates your confidence in the sustainability of the business going forward.
As they say, ‘different horses for different courses’. So it’s best to be clear on your objectives from the outset and talk through the key issues internally or with an external advisor to determine what’s going to be the best divestment strategy for your business.
At the end of the day, the trick is simply finding and connecting with those genuine buyers who are seeking commercial solutions to their own expansion & growth challenges.